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Mid-caps stocks, like Hill-Rom Holdings, Inc. (NYSE:HRC) with a market capitalization of US$6.5b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at HRC’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Hill-Rom Holdings’s financial health, so you should conduct further analysis into HRC here.
Does HRC Produce Much Cash Relative To Its Debt?
Over the past year, HRC has reduced its debt from US$2.2b to US$2.0b – this includes long-term debt. With this debt payback, HRC currently has US$187m remaining in cash and short-term investments to keep the business going. Additionally, HRC has generated US$428m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 22%, meaning that HRC’s debt is appropriately covered by operating cash.
Does HRC’s liquid assets cover its short-term commitments?
At the current liabilities level of US$697m, it appears that the company has been able to meet these obligations given the level of current assets of US$1.2b, with a current ratio of 1.69x. The current ratio is the number you get when you divide current assets by current liabilities. For Medical Equipment companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is HRC’s debt level acceptable?
With total debt exceeding equity, HRC is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether HRC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In HRC's, case, the ratio of 4.36x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as HRC’s high interest coverage is seen as responsible and safe practice.
HRC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around HRC's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure HRC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Hill-Rom Holdings to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HRC’s future growth? Take a look at our free research report of analyst consensus for HRC’s outlook.
- Valuation: What is HRC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HRC is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.